Ukraine energy

Gas imports drop and dispute with Gazprom escalates

July 9th 2018 | Ukraine | Energy

Event

According to Ukrtransgaz, the state-owned gas transport operator, gas imports dropped by 37% year on year in January-June, to 4.4bn cu metres (from 7bn cu metres in the same period of 2017). Meanwhile, Naftogaz , the state-owned Ukrainian gas company, remains embroiled in a dispute with Gazprom, the Russian state-owned gas monopoly.

Analysis

The reduction in gas imports suggests a sharp drop in domestic consumption. This could be due to increases in gas tariffs for households, improvements in energy efficiency or the early sign of an economic slowdown, possibly owing to a drop in industrial production (the latest data, however, indicate that industrial production grew by 2.5% year on year in May). Ukraine's gas imports came from EU countries such as Slovakia (nearly 3bn cu metres, or around two-thirds of imports), Hungary (1.1bn cu metres) and Poland (400m cu metres) through reverse gas flows. These countries import the majority of the gas they consume and re-export directly from Russia; as a result, Ukraine still consumes large quantities of Russian gas even though it stopped buying gas directly from Russia in 2015.

Meanwhile, the dispute between Naftogaz and Gazprom looks far from a resolution. In January the Arbitration Institute of the Stockholm Chamber of Commerce ruled that Naftogaz had to import 4bn-5bn cu metres of gas from Gazprom annually until its gas contract expires at end-2019; it is more expensive for Ukraine to import gas from Russia than from eastern European countries. Meanwhile, Gazprom was to pay US$2.56bn to Naftogaz in compensation in a long-standing dispute regarding a "take or pay" clause that had forced Naftogaz to pay for gas it did not import from Russia.

Gazprom refuses to abide by the arbitration ruling; Naftogaz is therefore seeking to seize the EU assets of Gazprom. On July 6th Gazprom had to disclose the assets it owns in England and Wales after a ruling by an English court, which subsequently banned transactions with these entities. Naftogaz claims that on July 4th a Swiss court froze some of Gazprom's assets in the Zug canton of Switzerland; Gazprom contends that Naftogaz misinterpreted the ruling. On July 13th a Dutch court will rule on whether to force Gazprom to disclose its Dutch assets.

Impact on the forecast

The decline in gas imports suggests that real GDP growth might be slowing, and we will monitor this closely. Meanwhile, Naftogaz and Gazprom will remain embroiled in legal disputes throughout our forecast period (2018-22).